NetEase Making Rocky Transition To Mobile Gaming

Chinese Web portal NetEase in Q4 continued its investment in mobile gaming and started expanding outside China, but it hasn't gained much traction with either effort.

The company, long a leader in desktop gaming, launched its first three mobile games in 2013.

But sales of those games have yet to offset its slowing PC gaming business, and NetEase (NTES) late Wednesday missed Wall Street's revenue expectations for Q4.

NetEase attracts a crowd at a China trade show last year, many of whom are busy with their mobile devices. Weng lei - Imaginechina View Enlarged Image

The company said sales excluding some taxes rose 9.8% from the year-earlier quarter to $400.2 million, less than the $408.6 million analysts had expected, according to Thomson Reuters. NetEase had posted 23% sales growth in Q3.

Gaming sales rose 14%, but that's down from 21% in Q3.

The company said its taxes jumped 191% to $26.9 million.

Still, NetEase stock, down early Thursday, ended the day up 1.2% as its Q4 earnings topped Wall Street expectations. Earnings per share minus items rose 28% to $1.57 vs. analyst views of $1.42.

Yet the Beijing-based company's focus on mobile will pressure its financial results in the short and long term, says T.H. Capital analyst Tian X. Hou, who on Monday downgraded the stock to hold from buy.

NetEase, through a partnership with Activision Blizzard (ATVI), has long held the exclusive license in China for "World of Warcraft," a popular video game. But while WoW remains one of the most popular MMORPGs — or massively multiplayer online role-playing games — that category isn't growing in China.

Such games are usually played on desktop computers, and gamers are fleeing to mobile devices.

Name Of The Game

The number of MMORPG gamers in China inched up less than 1% to 338 million in 2013 from 336 million the year before, Beijing-based Hou wrote in her research report Monday.

Meanwhile, mobile gaming and other mobile activities have climbed. The number of mobile game players in China jumped 54% last year to 215 million, she says. The number of mobile music listeners jumped 36% to 291 million, and the number of mobile video watchers jumped 84% to 247 million.

NetEase's focus on desktop gaming is a challenge, notes Hou.

"For NetEase, it appears they have already begun to experience those difficulties," she wrote.

NetEase's gross profit margin slipped to 71.3% in Q4 from 74.1% in Q3. That's in part because the company is spending more to build and market new games, acting Chief Financial Officer Onward Choi told analysts on a conference call late Wednesday.

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03/20/2015 01:46 PM ET

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